Upner report 43/2012

Gold and silver are still under pressure. German gold should be audited. Very confused week – who is right? Germans or Greeks? Will we witness conjoint central bank action in the near future?

Gold and silver were traded around $1729 and $31.67 per ounce at the beginning of the week. The most of the part of the week we could call as a sell-off time. Both metals were under pressure and they were catching important lower support levels. Gold tried to break $1700 and silver was very close to $31.5 level. The Friday session seemed to be much positive for precious metals but at the end of the day the prices were up just a little compare to previous day.

Gold finally closed the week on $1711.1 per ounce what was $9.4 less than the previous week. Silver closed on $32.09 per ounce what was almost the same price as the previous week. The gold/silver ratio is 1 to 53.32 (i.e. you could buy 53.32 gram of silver for 1 gram of gold, it was 53.65 week before). Silver was a little bit more successful compare to gold this week but nothing amazing happens. It could only indicate that silver could be push down more in following weeks.

It was the week of no important information. There were no fundamental and real reasons for any correction but prices go down. But I think that anybody should not be surprised because we were chatting about the correction quite a long time. The reason for that are vast short positions held by some bullion banks (especially by J.P. Morgan) on the COMEX which are declining but are still quite vast.

As Ed Steer from the Casey Research mentioned in his daily commentary we could expect some more price falls in gold and silver to set the price of both metals under their 200-days moving average. So we could expect $50 down for gold and $1 fall for silver in the near future. These could be the levels where big banks will very probably start to cover massively their short positions. Tom Fitzpatrik from City Bank thinks that the lower support area is somewhere around $1660-1675 for gold and it is around $30.75-31.25 for silver. But once again who exactly knows. Anything could happen and the sentiment on the market can change from hour to hour.

I think that we could consider this correction as some kind of buying opportunity for anybody who wants to invest in precious metals because generally we are still bullish in this sector in the long run. Please be aware of the fact that despite of some price correction nothing has been solved in the economy and for any politician are printing money machines definitely better solution than anything else.

Overview of the prices of gold and silver for the remaining periods:

Source: upner.com, kitco.com

News from the world of silver and gold

German gold was the top topic of this week; and not only for the gold community but in mainstream media as well. The Federal Court of Auditors in Germany recommend to the Bundesbank to audit German´s gold. Germany is the second largest gold bullion holder after the US. Germany stores its gold also in France, US and Great Britain. The Bundesbank does not agree with the recommendation because it believes to its counterparts about the integrity, reputation and safety of these foreign depositories. Do you expect some other reaction? You cannot. And the reason is very simple. Once the Bundesbank would admit that it is something wrong with gold as a consequence will be some kind of panic. But the Bundesbank admit that it imports 150 tons of gold into the Germany to melted it down and find out the quality of the bullion. After all it seems to me that there is some kind of paranoia and very probably should be.

As we mention earlier this year we have to be prepared for gold rush once the financial system will have real problems. Do not forget that the same is true about the counterfeit gold. Once the price of gold jumps up there will be more interesting to offer some counterfeits pieces. And this becomes more and more actual pattern. You can usually buy these bars with very good discounts. Some of the producers were found once again in China. What should have been gold for $510,000 were actually counterfeit bars for $300. Be careful what you buy because for example these kinds of bars had a very similar signs as Perth Mints bars have.

It seems to be that Chines do not have a strong demand only for gold but also for silver. It is presupposed that demand in the country will jump by 10% next year what means 7,700 metric tons of metal. The reasons behind this optimism are connected with both the investment and industry demand. The other reason is to invest in silver does not require so many funds as it is needed in the case of gold. “I’m bullish on silver, so I personally have stockpiled 3 tons of it at home,” said Yang Guohui, president at Hunan Yishui Rare & Precious Metals Recycling Co.. Good for him.

As we always inform you physical gold has the only risk – political one. It is very politically sensitive and once the real problems will come there will be some powers which will try to nationalize it as the US did in 1933. It is therefore very instructive to know some stories to avoid the risk. This one is about the Mr. Bernard von NotHouse; man who established in the US a private voluntary currency backed by precious metals and which he called the Liberty Dollar. What did he exactly do? He persuaded local merchants to use his coins and to offer them as change to willing customers. Once somebody does not want it he/she could easily change this private currency for actual dollar bills. Everything was based on voluntary decision. He faces of accusation of domestic terrorism present time because he managed the circulation of currency worth more than $60 million what according to judge undermine the government. He faces more than 20 years in prison.

Influential news

We could call this week as confusion one. If you ask Greece Finance Minister about the situation in the country he will respond that they already received two more years to meet their austerity and budgetary targets. Yes you read it correctly; another two year exemption. But once you ask for example German Finance Minister or spokesman of the IMF they declared that they do not know about this anything. So once again you could choose. Not enough? Some sources revealed that Greece will need another €16-20 billion in the aid; so to say European taxpayer’s money. I am very curious what really happens.

The Moody´s cut ratings on four Spain regions in the meantime; namely Catalonia, Extremadura, Andalucía, Castilla-La Mancha. Moody´s decision was driven by deterioration of their liquidity position and their reliance on short-term credit lines. So Andalusia asked for more help and Spain will very probably extend its regional bailout fund which is worth of €18 billion present time but yet only €0.82 billion left. Spain regions owe a combine more than € 151 billion. Regions are losing their ratings and it started to be more complicated for them to remain on the financial market. So to extend the fund will be probably the only possibility if bankruptcy is not desired. Try to guess who told this: “Things could be done more calmly, taking into account especially that we are in a recession.” I can give you some clue. It was not anybody from Greece, contrary it was somebody from Spain. If you said Prime Minister Rajoy, you were right. As you see austerity stinks to all countries which are in trouble. This is also the reason why everybody should realize that the European Stability Mechanism should be renamed on the European Waste Money Mechanism. More aid means just more time to continue in vast spending, less reforms and lower probability to return money from the fund in the future.

The Euro-Area Bailout Fund faces some new challenges on the highest European Court of Justice this time. A complainant is Mr. Thomas Pringle, independent member of Irish parliament. He claims that the ESM undermine the EU legal order and violates the no-bailout provision under EU law. Will be Mr. Pringle successful? What do you think?

Asian economies turn to Yuan more closely. Seven of ten countries are more tide to the Yuan than to the US dollar and only Hong Kong, Mongolia and Vietnam still have currencies which follow the US dollar. The dominance of the Yuan starts to be significant as the Renminbi (Yuan) denominated trade accounted for 10 % of total China foreign trade; it was zero two years ago. China could rise to the status of international currency in 10 to 15 years very probably and this could be also its time target for vast gold hoarding.

It seems to me that we will witness some new central banks stimulus in the near future. The indications start with the Bank of Japan which was asked by government to extend the asset purchase by another Y20 trillion. It is almost just a month ago when the BoJ surprised analysts by unexpected asset purchase by Y10 trillion which effect fizzled in 9 hours. Why could we anticipate a new coordinated action? There are also some other important news; for example Draghi´s pro-inflation speech given in the German Parliament where he defended OMT program which is primordially concentrated on the Spain and Italian bonds with the aim to lower interest rates for these countries. And we have also some rumors from the US. The last week FOMC meeting did not reveal anything new as was expected before the presidential election but some analysts start to speculate that the current QE3 program will be directly extended to $85 billion and that the FED will end the Operation Twist worth $45 billion in December. So put it together and we could have very probable once again some kind of coordinated action of most important central banks in the very near future. We will see.

According to the US Census Bureau three and half year of the Obama´ ruling did quite a big harm to the US middle class. It stated that the middle class household lost on earning $4,019 in real terms during this period. And what is behind it? Slow growth of the economy, of course. But what is more interesting are raising prices of food, gasoline, medical procedures and college tuition. The FED claims that it is not about the „core inflation„. But be aware of the fact that “core inflation” excludes food and energy prices, which are two of the biggest components of consumers budgets. And be sure that this path will continue because the FED is not going to stop to inflate the US dollar.